Corruption in a Global Context

CORRUPTION IN A GLOBAL CONTEXT Lecture delivered to OxFID on February 10 2013 at the Said Business School, Oxford University

John Drysdale Chairman, Transparency International UK 2008-2012

CORRUPTION IN A GLOBAL CONTEXT1

1. Definitions First, I’d like to define corruption. At Transparency International – TI for short, we define corruption as ‘The abuse of entrusted power for private gain’. Points to bear in mind are: 

This is not a legal definition: that would be rather difficult in a global context.

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The abuse can be by persons or institutions.

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The gain is not necessarily financial.

I’d be grateful if you could bear this definition in mind during my talk.

2. Outline May give you an outline of my talk which is wide-ranging and covers many facets of corruption: 

First a bit of background history, dividing it into the Cold War period up until 1989 and then up to the present day.

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Then a brief description of TI which was formed in 1993 and of TI-UK.

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Then I will briefly cover six areas of corruption; Politics, Economics, Business, Justice, the Poor and Aid.

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Then Money Laundering.

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Finally corruption and Civil Society.

And will look forward to your thoughts and questions.

3. Background History 

Until the 1990s, the word corruption hardly featured in political, economic, financial, social and media circles. Nothing much was taught about corruption at universities and business schools and international business was not taken to task for paying bribes. Neither were individuals. Put simply, corruption was not seen as a serious issue or problem.

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The Cold War between the West and Communism was the prime reason for this lack of interest. In this battle, the West happily supported corrupt regimes and leaders provided they were pro-West and anti-Communist.

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For example, President Mobutu of Zaire, later the Democratic Republic of the Congo, was feted by the West and showered with loans and support from multilateral donors.

He was unbelievably corrupt and looted his country, but no-one wanted to know. He left a fortune of up to $10 billion. President Suharto of Indonesia was in a similar position and his fortune has been estimated at around $15 billion. Again, the multilateral donors were hugely supportive. President Marcos and his wife in the

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Note: this is the edited transcript of a lecture and therefore does not contain references or footnotes.

For the sources, please refer to the websites www.transparency.org and www.transparency.org.uk.

Disclaimer: opinions expressed are those of the author and should not be taken to represent the views of Transparency International.

Philippines were monumentally corrupt but retained the full support of the United States.

President Duvalier in Haiti: a similar story. 

Concurrently, the United Nations was silent on the subject of corruption as were multilateral donors such as the World Bank and the IMF.

I’ve just been reading an excellent book called Wilful Blindness and what it says describes very well the state of denial about corruption which existed in those days, primarily due to the Cold War.

Corruption did briefly raise its head in the United States in the 1970s due to the Watergate scandal when it was discovered that many US corporations were secretly funding the Nixon re-election campaign. This spilled over into overseas bribery by US corporations, most notably the Lockheed scandal. As a result, the Foreign Corrupt Practices Act- the FCPA - was signed by President Jimmy Carter in 1977. In recent years, the FCPA has been more vigorously enforced.

All of this started to change after the fall of the Berlin Wall and of Communism in 1989. US policy changed to one of calling for a level playing field in support of its business corporations.

Corruption was, quite rightly TI would say, gradually recognised at the highest levels as a huge political and economic problem. 

The Organisation for Economic Co-operation and Development - OECD - passed its Anti-Bribery Convention in 1997.

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The Financial Action Task Force - FATF - , an inter-government agency, was formed to counter money laundering.

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The United Nations passed its United Nations Convention against Corruption UNCAC - in 2003.

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The World Bank started to take corruption seriously with a famous speech in 1996 by then President James Wolfensohn where he called it the “cancer of corruption”.

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The UK passed it own Bribery Act in 2010.

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Corruption is now firmly on the G20 agenda and there is a very active working group of governments and civil society organisations driving it (including TI).

Sometimes, geo-politics takes us back to the Cold War days. A blind eye was turned on corruption in Iraq after the fall of Saddam Hussein. In fact the US administration not only failed to control corruption; it showered the country with billions of dollars which allowed corruption to flourish. There is a similar story in Afghanistan where corruption is rife but for strategic reasons we need the support of the Afghan government, corrupt though it is. The same is also true to a certain extent in Central Asia - Uzbekistan, Kyrgyzstan, Kazakhstan, Turkmenistan and Tajikistan - where corruption is endemic but the West, Russia and China are vying for influence with the various corrupt leaders due the vast gas reserves.

Nevertheless, progress since 1989 has certainly been made and corruption has climbed up the political, economic, financial, social and media agendas.

4. Transparency International Now I’d like to talk a bit about Transparency International, or TI for short, which is so much a part of the anti-corruption story. It was formed in 1993 by a group of people led by a German called Peter Eigen. It has become, in effect, an international anti-corruption NGO. 

Peter was in charge of the World Bank’s programmes in East Africa and was appalled by what he saw: in the early nineties, by some estimates, up to 30% of World Bank loans were being looted by corrupt politicians and officials. Headquarters in Washington, however did not seem to want to know, whether through wilful blindness, a lack of proper internal controls or due to the Bank’s policy of not interfering in the internal affairs of loan recipient countries even when wrong-doing was suspected or proven.

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Peter was rebuffed time and again when he complained. Eventually he left the World Bank and led the formation of TI based in Berlin in 1993. It proved to be the right idea at the right time and has since taken off. We now have chapters in over 90 countries and feel we are now, finally, really gaining momentum.

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TI is perhaps best known for its annual Corruption Perceptions Index - the CPI - which ranks 176 countries by perceptions of corruption. The top 4 are Denmark, Finland, New Zealand and Sweden and the bottom 4 are Sudan, Afghanistan, North Korea and Somalia. The United Kingdom is ranked 17th, jointly with Japan. This index is now widely used especially by companies which do business, or are thinking of doing business, in countries at the lower end of the Index.

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TI also publishes biannually a Bribe Payers Index - BPI – which ranks business sectors. The worst are the defence, construction and natural resource sectors.

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TI has over recent years moved to be of more help to ordinary citizens by setting up centres in various countries which receive information and complaints from the public about corruption. They are, in effect, Citizens Advice Bureaux and are proving to be a great success. There are more than 50 of these world-wide, from Argentina to Zimbabwe.

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TI and its many chapters are in full flow and the drive and enthusiasm is heartening to see. There are also very many brave people who face constant threats and intimidation by virtue of their commitment to fighting corruption. I’m thinking here especially of Elena Panfilova who is head of TI-Russia. She is amazingly courageous and deeply committed. I admire her enormously.

Turning to TI in the UK, we are also very active and making our mark. 

We pushed hard and effectively for the passing of the Bribery Act in 2010.

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In 2011, we published a major report on corruption in the UK together with a series of policy recommendations.

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We have done work on money laundering especially given the City of London’s position as the world’s leading financial centre.

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Currently, we are leading a major world-wide programme on corruption in the defence industry which is attracting a lot of attention.

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We host speakers and give seminars on a great variety of corruption topics.

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In general, there is a great deal going on.

There are, of course, websites: www.transparency.org for the International Secretariat in Berlin and www.transparency.org.uk for us here.

5. Six Key Areas Next, I said I would briefly cover six areas of Corruption: Politics, Economics, Business, Justice, the Poor and Aid. There are of course others. In fact, TI has a standard analysis called the National Integrity System, which examines a dozen key pillars for a country’s integrity, including parliament, the judiciary, law enforcement and electoral management.

5.1 Corruption and Politics Corruption in politics is a many headed hydra and in many countries, whether democracies or autocracies, political parties and politicians can be enmeshed in webs of corruption. I’ll just give you an idea of what I am talking about. 

Political parties can be funded by business which also pays bribes to politicians and officials in order to secure lucrative overpriced public sector contracts. Take the example of Greece. Wealthy business leaders put their money offshore and evade paying taxes. In return, they help fund political parties and maybe also bribe politicians who in their turn award them overpriced profitable contracts especially in the construction sector.

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Criminal gangs can also fund political parties and bribe politicians, be they drug traffickers, human traffickers, thugs or whatever. This is really protection money which enables them to continue in business. In Mexico, for example, there are very murky relationships between drug traffickers and politicians.

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Meanwhile, the political parties use the money from business to buy votes, rig elections and buy off the opposition. This is what happens in Russia, for example.

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Then politicians and public officials, including the armed services top brass, can simply loot public funds and enrich themselves. Nigeria with its oil and Zimbabwe with its diamonds are prime examples here.

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For example, oil pipelines in Nigeria are illegally tapped by local militias and the oil sold at below market prices to vessels out at sea which are capable of taking small quantities of oil. These vessels are allegedly owned or leased by senior Nigerian officials and politicians. The oil is then sold into the global market at market prices.

This scam has cost Nigeria billions of dollars.

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Once political parties and politicians succumb to corruption, this culture is rapidly emulated by those lower in the pecking order and becomes a way of life, if not survival. You then get systemic corruption across the board. Just have a good hard look at Nigeria, Russia and India.

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And so on and so on. In far too many countries it is not a pretty picture.

5.2 Corruption and Economics This is a big topic and I would like to mention just three consequences of corruption. 

The evidence we have is that corruption distorts the efficient allocation of resources towards those activities which have a higher bribe content. This is hardly surprising and is especially true in the defence and construction sectors. It can also lead to shoddy workmanship and a failure to meet contract specifications as officials have been bribed to turn a blind eye. Examples of this are when housing blocks collapse during an earthquake or when roads rapidly deteriorate.

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Corruption can also retard economic growth although this largely depends on whether the funds received from bribes stay in the country or not. For example, in Africa, money laundering is rife and the funds looted through corruption tend to go overseas. In India and China, it is more the case that the funds stay in the country and are invested locally: economic growth is distorted but may not be so impaired – although it still means those funds that should be invested in public services are diverted elsewhere.

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A culture of corruption also tends to encourage the black economy based on cash and the evasion of tax. This means that in relation to the actual size of the economy, the State does not collect the tax due to it and does not have sufficient funds to invest in, for example, education, healthcare and infrastructure.

There are many other economic consequences and I would invite you to think about them.

5.3 Corruption and Business For corruption to take place it takes two to tango, so to speak. You need a bribe payer and a bribe taker. On the whole it is business, whether local or international, which pays the bribes and politicians and officials who receive them.

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As for local businesses, it all depends on the country and whether the lead from the top is one of corruption or not. You might think that it also depends on whether a country has anti-corruption laws in place but in our experience, an overall culture of corruption tends to mean that local anti-corruption laws are simply ignored. What is needed is here a combination of the right laws, political will, and sufficient resources for law enforcement. There is, for example, an anti-corruption law in Nigeria but it is not enforced. The lead from the top in Singapore, on the other hand, means that there is very little corruption and local businesses do not have to pay bribes to gain contracts.

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The legal sanctions against international business have recently tightened due to a more rigorous enforcement of the FCPA. The fact is that the tentacles of the FCPA now reach far and wide as BAE Systems in the UK and Siemens in Germany have both found. Siemens, whose senior managers admitted paying bribes all over the world, was forced to pay $1.4 billion in its settlement with the FCPA and German authorities. In this country, the new Bribery Act, which also has a long reach, is having an impact, not yet in prosecutions and fines, but in a changed attitude towards corruption by international business.

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On the other hand, the emergence of the so-called BRIC countries - Brazil, Russia, India and China – onto the world business scene is proving to be a real problem. All of these countries suffer from corruption. Their rankings on the 2012 Corruption Perceptions Index are amongst the lowest – Brazil 69 out of 176 countries, China 80, India 94 and Russia 133. The 2011 Bribe Payers Index ranked China, Russia and Mexico as the countries whose companies were most likely to pay bribes.

There’s a lot more that I could talk about here and I’d welcome questions on this whole area.

5.4 Corruption and Justice At TI we recognise that the Rule of Law is absolutely crucial in the fight against corruption as is an honest, independent and impartial judiciary. 

Sadly this is not present in many countries where the separation of powers between the law and politics barely exists and the legal processes are neither honest nor transparent.

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Until recently, many public prosecutors felt that it was very hard to take senior politicians to court on bribery charges and win. Meanwhile, the public in some countries such as Ethiopia, Ukraine, Peru and Croatia perceives the judges to be not only the mere pawns of powerful politicians but also to be corrupt.

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I heard a story the other day about a Russian judge. The defendant in a case had paid the judge a substantial bribe but was dismayed when he lost his case. Shortly afterwards he received a letter with a cheque from the judge. The judge explained in his letter that he felt it was a matter of honour to return the defendant’s money as the plaintiff had paid him a higher amount.

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On the other hand, times are changing and we are now seeing many more countries where corruption charges are being successfully brought against powerful politicians and officials.

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In Peru, for example, it took fantastic skill and amazing courage for a small team of public prosecutors and honest judges to bring successful corruption charges against former President Fujimori and his henchman General Montesinos. This was a great victory for the Rule of Law and sent shockwaves across Latin America.

Just to repeat myself as it is so important. Impartial justice and the Rule of Law are crucial elements in the fight against corruption and a culture of impunity.

5.5 Corruption and the Poor All our research and experience at TI indicates that corruption bears down most heavily on the poor. They are the most affected by the looting of public sector budgets; they are also not in a position to receive bribes but often have to pay them. Let me try to explain. 

Corrupt politicians and officials often loot money from national and regional budgets which has been allocated, for example, to the provision of public services on which the poor depend. I’m talking here about health care, education, food subsidies, irrigation and so on. In the state of Orissa in India, for example, it was discovered that 32% of the budget for irrigation systems had been siphoned off.

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The poor are also hugely affected by corruption at the local level. Having to pay a bribe to get a child into school. Having to pay a bribe to get a bed in a hospital.

Having to pay a bribe to the police to escape a trumped up charge. In many cases, these bribes are paid for services that are technically “free” and constitutionally guaranteed to all citizens.

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In Kenya, for example, TI estimates that the poor, who live on around $150 dollars a year, have to pay bribes which total, on average, around 20% of that annual income.

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TI did a survey in Pakistan and found that of those surveyed, 43% paid bribes to local government officials, 69% paid bribes to the judiciary, 84% paid bribes to the police and 48% paid bribes for medical services. The poor, needless to say, are the least able to pay and suffer accordingly.

The poor are thus doubly penalised. Not only has the provision of public services been diluted by corruption but they also have to pay bribes to benefit from what is available and to which they are entitled.

5.6 Corruption and Aid I’m not at all an expert on development economics and I imagine you have already heard the arguments in favour of, or against, aid to the developing world. I have read Dead Aid by Dambisa Moyo where she makes a strong case for free trade and the markets and argues against aid, especially that from governments and bilateral agencies. Equally, I’m aware that Jeffrey Sachs is in favour of more aid to Africa and I can also see that emergency aid after natural disasters is a good thing. TI’s own official position is that there should be an increase in aid if the Millennium Development Goals are to be achieved, and that aid should not be cut off in cases of corruption but rather re-routed to ensure that a country’s citizens do not suffer twice over – first from having corrupt rulers, and second through losing the services such as education and healthcare that aid money is then meant to fund.

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Many dictators, politicians and officials are looting money which could otherwise have been spent on alleviating poverty and investing in the development of their countries.

The sums involved are only estimates but TI reckons that whereas the total of aid to Africa, whether government to government, bilateral institutions to government, or private sector charities to particular projects, is running at around $ 50 billion per annum, the corrupt funds laundered out of Africa is probably in excess of this total.

These figures are substantiated in the excellent research conducted annually by Global Financial Integrity in Washington DC.

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Corrupt elites are therefore laughing all the way to offshore banks, leaving the aid industry to come in and fill the gap. It has been argued that the aid industry is, albeit indirectly, helping to sustain and even promote corruption as these corrupt elites are let off the hook. Meanwhile, as Dambisa Moyo has shown, a culture of dependency has been created. Of course, this puts humanitarian organisations in a very difficult situation. Perhaps we need more creative solutions about how to overcome such situations.

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Dare I also say that aid teams combatting emergency and crisis situations on the ground may become engaged in paying bribes and donors (whether governments or NGOs) can suffer from corruption in their operations. The broader consequences of this have been under-rated.

All of this raises an awkward question. Where governments are corrupt and there is no rule of law, should aid be withheld from such governments until the situation has demonstrably improved? And if so, what alternatives might there be to ensure that citizens do not suffer? I would suggest that we need to do more to ensure that anti-corruption and development objectives are aligned and not contradicting each other.

6. Money Laundering From my introduction, you’ll no doubt remember that I would next talk about Money Laundering.

This is a huge topic and given the time available, I should like to give you a hypothetical example of money laundering which captures the essence of what can and does happen. 

The prime minister of a country rich in natural resources, after discussion with ministers, officials and armed forces senior staff, has decided to buy fighter jets from Russia costing $1.5 billion although it is not at all clear why they are needed. The actual contract is for $1.8 billion as a 20% bribe element has been added. The country is therefore paying for the jets at a vastly inflated price. As national security is involved, there is no detailed scrutiny of the contract by parliament. The bribe of $300 million is then distributed among those involved in the decision and the prime minister himself receives $70 million.

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Most of the $300 million bribe is then money laundered into offshore tax havens so the country, having overpaid for the jets, gains no benefit from the bribe element.

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The main requirement for the laundered money is that the beneficial owners should remain secret. This is not difficult as a veritable army of advisors, mostly lawyers and accountants, are available to set up offshore trusts, companies, bank accounts and so on and to advise on how to invest the cash. I’m sorry to say that a lot of this expertise resides in London especially if the money is laundered to the UK’s Crown Dependencies and Overseas Territories. At TI we call them Secrecy Jurisdictions.

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The prime minister’s London advisor puts $30 million into a bank in the Cayman Islands. He is not alone. The Cayman Islands has a population of 56,000 and the Queen appoints the Governor. It is home to around 600 banks and 80,000 registered companies. Through the interbank market, $25 million is then put on deposit with a bank in London. The remaining $5 million is put into a trust which then invests in a new company registered in the UK.

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Meanwhile, the remaining $40 million is put into a company in the British Virgin Islands. Again the advisor is not alone. The population totals 25,000 and around 800,000 companies are registered there. The $40 million is then used to buy a home in Mayfair. Again, the advisor is not alone. 80% of expensive flats in a recent luxury development in Central London were bought through British Virgin Islands companies.

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Please note that all of this corrupt $70 million has been laundered to the UK and that secrecy has been maintained. I was amazed to discover that neither Companies House nor the Land Registry insist on knowing who the beneficial owners are of new companies formed or properties purchased. In fact the UK is seen as another offshore Secrecy Jurisdiction.

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The overall consequence is that a new company can be formed or property purchased by: o

A corrupt Russian politician

o

A corrupt Middle East dictator

o

A corrupt company or individual who has used money from tax evasion.

o

A corrupt Cambodian official who has turned a blind eye to illegal logging

o

A corrupt Italian or Greek politician

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A drug trafficker from Latin America

And we have no idea who they are.

I leave you to think about what I have told you about money laundering and the fact that the UK is seen as a secrecy jurisdiction.

7. The Role of Civil Society Lastly, I’d like to touch on corruption and Civil Society where the situation is very interesting.

The fact is that civil society around the globe is becoming increasingly disenchanted and exasperated by corruption and this is beginning to have political consequences. 

The Arab Spring had a lot to do with the perceived corruption of dictators, including their families and close associates. Time and again this came up during television interviews.

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The mood in China is one of increasing anger against corrupt local officials and party elites and there are frequent demonstrations. Both Premier Wen Jiabao and President Hu Jintao have very publicly referred to corruption as a major problem.

The New York Times has run an expose of the family fortune of Hu Jintao himself.

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The anti-corruption protester, Anna Hazare has gained a lot of support in India and forced the politicians to at least consider anti-corruption legislation.

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Alexei Navalny in Russia has also made an impact.

All of this is greatly helped by the social media: the internet, websites, Wikileaks, Twitter, Facebook and so on. These are very powerful tools in the hands of anti-corruption activists although it remains to be seen how much will actually change as corruption is so embedded in so many countries.

8. Higher Education I mentioned at the beginning of my talk that, during the Cold War, universities and business schools paid scant attention to corruption and its dire effects on politics, economics and civil society. Although this is still the case in most universities, I’m glad to see that Kellogg College in Oxford has created a Governance and Transparency Centre which has corruption at the heart of its research.

9. Summary I think it would be helpful if I just summarised what I have covered: 

First, there was some history, which covered the Cold War up until the fall of Communism in 1989 and then the period up until now.

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Then, I talked about TI as a movement and referred to TI-UK.

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Then I briefly covered six areas of corruption: Politics, Economics, Business, Justice, the Poor and Aid.

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Then I referred to Money Laundering by using a hypothetical example.

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Then, I talked about corruption and Civil Society.

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Lastly, I referred to some more encouraging developments in the higher education sector, including the new Centre at Kellogg College here in Oxford.

10. Successes For all the many difficulties in tackling corruption, especially when it is so embedded in so many countries, I should like to end on an optimistic note. 

Corruption is now high on many international and national agendas.

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Successful prosecutions of senior politicians and officials and companies in many countries are beginning to take place.

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The legal and financial sanctions against international corporations which pay bribes are beginning to have an effect.

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And probably most important of all in the long run, civil society in many countries has had enough and is beginning to campaign vigorously and effectively against corruption.

11. Questions Thank you very much and over to you for thoughts and questions.